What We Owe the Chinese: A Debt to Equity Conversion?

China’s premier expressed concern Friday about its massive holdings of Treasuries and other U.S. debt, appealing to Washington to safeguard their value, and said Beijing is ready to expand its stimulus if the economy worsens.

Premier Wen Jiabao noted that Beijing is the biggest foreign creditor to the United States and called on Washington to see that its response to the global slowdown does not damage the value of Chinese holdings.

“We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I’m a little bit worried,” Wen said at a news conference following the closing of China’s annual legislative session. “I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets.”

The Chinese have good reason to worry, especially if (or perhaps when) the stimulus turns inflationary and their interest rates’ real return goes negative (as it did for everyone in the 1970’s.) A simple solution would be a broad based “debt to equity conversion,” where the Chinese took equity interests in corporations, property, etc. But there would be extensive bawling and squalling about this, as there was when CNOOC tried to buy Chevron. It would shift control of our economy from Washington to Beijing (looks like that has already shifted from New York to Washington.)

Given the way our masters in Washington are moving with no regard for basic economics, that might not be the worst thing that could happen…